How low can the commodity prices go?
There’s been a great rally on the down side for the commodity prices. The down trend is very strong and the bulls will have to wait a little more before we start to see again prices rising. Most likely we are in a distribution phase in these markets. Some of the over-investments that have been done in the sector are turning back to be bad investments. The mining industry and the oil and gas industry are at a critic level of resistance. There are almost two consequent quarters of bad losses for the major companies of these sectors.
Is that more a result of an oversupply or a weak demand? In the Oil and Gas industry that’s for sure a supply problem, as the demand hasn’t changed much in the last months. While in the hard commodities and mining industry there’s also weakness on the side of the demand. The slowdown of the Chinese economy has been one of the major events that has affected the demand of the major hard commodities, principally the Copper which is a thermometer of the demand strength of row materials in general.
The reason why we see such big losses in the mining and oil industry is that the prices are becoming very hard to forecast. The companies of these sectors can protect their production up to a certain point, but when the prices start to fall at this rhythm, for such a short time, it becomes really hard to operate in the sector. Many investments have been projected at the half of the last year prices and within twelve month, the chief financial economists of these companies are incredulous in front of the screens.
Many countries, such as Venezuela, Mexico, Norway, Russia and Golf’s countries are at a critic point. Their budgets are financed mainly by oil and gas revenues and taxes. Many companies of the extracting sector are surviving with debts and many others are failing or closing temporary. Now the question is: for how long can it last?
Goldman Sachs has predicted a $20 oil price within the next year. If this happens, it could be the most dramatic plunge of the oil price in the recent history. It might happen for a short time but it couldn’t protract for long. That price is unsustainable and won’t last.
Commerzbank has forecasted an average price of oil at $55 the next year. At this level we will see the shutdown of many rigs and the sector consolidation, accelerating in the US. The Majors of the Oil sector can survive for other two quarters in losses. Russia, Venezuela and Mexico will cut many investment projects and will enter into recession. There is no way for these countries to avoid the slowdown of their economy.
With such commodity prices inflation won’t be a problem for the next year and most likely the QE in the Euro-Area will continue, the Fed will slowdown the pace, after the expected rise of the rates this year. The Yuan devaluation will help China to export more and probably the growth in this country will be stabilized next year. These conditions will push investors to think positively for the next year and we will see a recovery especially in the hard and soft commodity prices. We consider the $2.400 price of Copper at the Comex Market a strong support.
Meantime our expectation for the oil and gas prices remain low and the risk of default will increase dramatically in the oil depending countries and in the high yield oil companies. The Bloomberg Commodity Index will force its bottom again this year and in the first part of the next year. But starting from the second quarter we expect to see this index recovering from its lows. There will be huge opportunities for investors to enter at low prices in the sector this year. We expect to see the bottom of this rapid plunge of the Bloomberg Commodity Index in the next six months.